Readers' comments

Obviously, all the regulations instituted since the previous sets of banking catastrophes haven’t changed a single thing. If anything, they have allowed all the risk pressure to build and have a greater chance of exploding. It shocks me that the FDIC is unable to meet its obligations as an insurer of bank deposits. It was supposed to instill confidence, and the mere existence of it to prevent a disastrous run on the banks. However, we now learn that this problem is so extensive, that not even the FDIC can confidently prevent that which brought it into existence. Ironically, all of the financial gurus have proven one thing - they are no better at financial management than your average American. Even Worse, since they have study the discipline of finance (and economics supposedly), they proven to be utterly inept and incapable of money management, and are therefore worse than the common man in terms of financial management. We lambast the common man for not saving, or investing into stocks, yet how is the current situation to instill confidence in them? The very people we are told to trust, lead us down this path. We are better off trusting the bottom of our mattress as a financial advisor than the fools of Wall Street. I didn't know playing poker or black jack is the only prerequisite for becoming professional investor. So, I have no sympathy for any bank which may dissolve/collapse. This is needed for any robust economy to work properly. If this wasn't the case, then there is no such thing is risk, and returns no longer mean anything (since returns/interest is a gauge of risk - you know, a measure of the odds of success versus failure). So essentially, by not letting banks fail, even disastrously, we have decided that we do not accept the fundamental principles of Free Market economics, and are therefore of socialist design. And, since when did we forget that higher returns equate to higher risks? Didn't the increase in returns signal to anybody that banks where taking on larger than normal risks, and therefore more susceptible to losses?

Punishing already weaker banks to pay more premium is exactly the kind of thing that should be avoided. It will push them over the edge because: (a) They pay much more higher premium, and to get that money back they will start riskier lending; (b) Doesn't provide incentive for the weaker bank to return to a strong position, it only reinforces a criminal.
Charge stronger banks higher premium and threaten weaker banks with directed criminal action/forced liquidation. Stronger banks no doubt will object, but they forget they too are part of a system.

This whole episode makes one wonder what should be the change in regulator's role in future. Should there be more tightening of regulations that ensure predictability at the cost of market freedom? Also would it not be critical to look at regulations to protect small investors? They are always the worst hit.

Let's see. Would 100% reserve requirement eliminate the contagion effect? I would think so, but that is far too honest for our bankers. "Respectable" banker is an oxymoron unless respect can be bought with "made from nothing money".

All the problem is rooted in that supervisors and regulators are bought by banker and allow them to do anything without consideration of consequence. The credit crunch will end up at the cost of taxers not shareholders of these notorious banks.

“. . . Joseph Mason of Louisiana State University. Extrapolating from the savings and loan crisis of the early 1990s, and allowing for the growth in bank assets, he puts the possible cost at $143 billion.”

Sir, the crisis occurred well before 1990 starting in 1986. The bulk of the banks and savings and loans had already been resolved by the FLIC and RTC by the end 1990; this was the year of the great recapitulation when the RTC, created under the Financial Institutions Reform, Recovery and Enforcement Act, dumped the assets including commercial real estate concentrated in the oil patch states. In the summer of 1990, real estate assets were being liquidated wholesale by the FLIC and the Resolution Trust Corporation. I sold a number of finished residential subdivisions that summer owned by the FLIC in the Dallas/Ft Worth Metroplex and worked with the asset managers of the FLIC and the broker (whose husband was the bankruptcy attorney for the Hunt’s of Ft. Worth) who handled most the inventory of neighborhood shopping centers in the metroplex for the RTC. I worked with a broker in Ft. Worth who had set up multiple faxes because some weeks on Fridays the asset managers working for the government agencies would call to say that the first offer, not the highest price, received by closing that day would get the property. By 1993 my clients and I began selling some properties we had purchased in 1990 and 1991 at prices well above what was paid.

Solomon Brothers set up a vulture fund that purchased that summer for $500,000,000 all the inventory of apartment buildings that had been acquired from calling the loans held as assets by Sunbelt Savings, one of the largest and most notorious S&Ls. The reporter should get the facts straight before writing the article.

As far as Joseph Mason’s analyses, the extrapolation is flawed (as most hypotheses by analogy are). I could go into greater detail why the structure of the S&L crisis of the late ‘80s was different from what is happening today but to put it in a phrase: The financial crises today is a liquidity crises that has resulted in the failure of some banks: the S&L crisis was the failure of many banks and S&Ls that resulted in a liquidity crises primarily for the commercial and investment real estate and junk bond markets. That his analysis is flawed does not prove that more banks will not fail, but it gives no insight into the reality of the situation. Try to find an analysis that does. I, and perhaps many other readers, would find it interesting.

"The pressure in the hose is going to be gone to push the economy forward."The pressure is already out of the hose in some economies like the USA. Every time there is a wide spread financial meltdown the speculators (more aggressive players) get hit, or if they are above the curve pull out of the market in the short term. That doesn't mean they are gone forever, you already see "safe" money poring into commodities, at some point the speculators will be back with new structures and vehicles. Balancing out risk by turfing the riskiest lenders who lost is just market churn. Don't be too impressed by the bad news near the bottom of a bad cycle - no one can predict the future and often the factors that change markets substantially (positively or negatively) can't be identified except in hindsight. To talk about "upcoming" deflation is like talking about an upcoming "Apocalypse", it is more speculation than rational analysis.

You guys miss it. This is deflation, not inflation. The pressure in the hose is going to be gone to push the economy forward. This won't only be true of the US, but the world, as we are now seeing in Europe and coming soon to China and its over 50% loss in the Shanghai stock market. I am amazed anyone is buying stock in this type of environment where cash is going to get tougher and tougher to come by.

As shown in this article, it is somewhat satisfying to see sharp operators become ensnared in their own trick solutions. However, a financial bailout that is truely honest is one which backs the FDIC. Here we have an agency whose funds 'rewards' those who save, not those who spend. While those who save are little rewarded by modest interest rates they may be rewarded by safety of savings.

Pity about the negative effect of inflation on savings. Only an honest administration of fiscal and monetary policy will curb inflation. Government inflation-proof bonds will not. I don't suppose we could convince the administration to bail out the losses suffered by savers due to inflation. No, probably not. It would be too easy to compute.
Tir Tairngire

Many of the smaller troubled and failed banks were creatures of their own destruction, selling their souls for 50 bp.

First, they took their balance sheets out of the lending business. Their loans, initially meeting credit criteria were sold to GNMA, Fannie Mae and Freddie Mac. In return, they purchased certificates from these institutions yielding slightly more and with nominal terms slightly less than the loans they old. This was investment grade paper more closely matching the term of their liabilities. In rated portfolios, surely with less risk.

Then they took on a new form of derivative security called CDO and SIV -- rated and in some cases insured -- put together by clever investment bankers with a higher yield and shorter average maturity that the traditionals.

All of the above was regulator approved.

Next, they got out of the loan servicing business, selling to specialized banks who computerized the whole affair. That left them only with customer deposits and no interest in credit worthiness. Not their responsibility.